10/31/2008 @ 12:00AM

Obama And The 'Drug Killer'

One of the unpleasant things I do as a consultant is recommend that pharmaceutical firms halt the production of uneconomical new medicines. I’m a drug killer.

If American voters hand Barack Obama the presidency and a filibuster-proof Democratic Congress, I’ll be doing a lot more of this unhappy work.

Say a biotech company is developing a new drug for breast cancer. My consulting firm, Objective Insights, looks at the financial value of the project. If the expected value–probability-adjusted value–of the project is negative, we suggest discontinuing development. Often, millions of dollars have already been spent.

A lot of new medicines are tossed into the trash for reasons that have nothing to do with safety and efficacy. We have helped kill drugs for brain cancer, ovarian cancer, melanoma, hemophilia and other debilitating conditions. It breaks my heart. But we would never recommend that a company knowingly lose money unless some other crucial, nonfinancial objective was being achieved.

The economics are daunting. A study by Joseph DiMasi, an economist at the Tufts Center for the Study of Drug Development in Boston, found that the cost of getting one new drug approved was $802 million in 2000 U.S. dollars, or $1.02 billion in 2008 dollars. Most new drugs cost much less, but his figure adds in the expense of each successful drug’s prorated share of failures.

The worse news is that this number is certainly higher now than when DiMasi published his study. Since
Merck
withdrew FDA-approved Vioxx from the market because it might increase its users’ risk of heart attack, the Food and Drug Administration has been slower and more conservative, rejecting many new medicines.

The FDA now requires that more patients participate in clinical trials, which adds to both the costs and time of conducting the trials. It also sets deadlines by which it promises to give innovating companies rulings on new drug applications. In the last year, the FDA has blown by many of these dates without so much as a “sorry” or a “we’ll catch you later.”

The FDA is even having trouble setting up advisory committee meetings, which are often required to secure an outside opinion on a drug. The FDA tried to convene one such meeting in early August–but when all those with alleged conflicts of interest were excluded, just one member was left. And he may be recused, too, because Congress has written tough conflict-of-interest rules for a problem that research has shown is imaginary.

In 2006, Sidney Wolfe and three of his fellow employees at Public Citizen’s Health Research Group published an article in the Journal of the American Medical Association that drew on 221 meetings of FDA advisory committees, including 76 product-specific meetings that involved yes or no votes on individual drugs. Their findings? None of the 76 voting outcomes would have changed had voters with supposed conflicts of interest been excluded. But this hasn’t stopped Congress from insisting on the conflict-of-interest policy, making the FDA’s job tougher.

America’s health care system might someday look like mainland Europe’s. There, when a drug is approved, sales are insignificant until the government-run health system agrees to pay for it. This can easily take a year after the regulatory approval date; each day costs the drug company millions in lost sales and prospective patients even more.

Things are even worse in the U.K., where the National Institute for Health and Clinical Experience (NICE) evaluates new drugs on their economic value. While this may sound fair, NICE requires even more clinical data from drug companies–increasing cost, time and risk–and then rejects just about every new medicine that comes in front of it.

In effect, NICE is a gatekeeper that prevents the struggling national health system from paying for new, expensive medicines. As a result, diseases like prostate cancer are treated with outmoded technologies–and significantly less aggressively–than in the U.S. If NICE controlled our automobiles, we would all be driving used 1983 Honda Civics.

Economists have long recognized that good decisions cannot be made without considering an individual’s unique characteristics and preferences. But the FDA and NICE have little knowledge of a given patient’s tolerance for pain, fear of death, desire to live, general values or health status. Their blanket decisions, then, are imperfect because they lack fundamental information about the consumers of these medications.

Ludwig von Mises, an Austrian economist, formulated this same argument in a universal form when he identified the Achilles heel of socialism. Centralized governments are usually incapable of making good decisions for their citizens because they lack most of the relevant information. In retrospect, that’s one reason the Soviet Union failed.

It’s not surprising that a drug reimbursement framework like NICE is what Obama and other Democrats want to bring to America.

Fine, you might say, because drugs in this country are too expensive. But while new medicines are expensive to discover and develop, they are often cheap to manufacture. In this sense, they are like DVDs and computer software. This means that for a drug company to be profitable, it must price its drugs well above its production costs.

As I wrote in the Concise Encyclopedia of Economics: “What complicates the picture is socialized medicine, which exists in almost every country outside the United States and even, with Medicare and Medicaid, in the United States. Because governments in countries with socialized medicine tend to be the sole bargaining agent in dealing with drug companies, these governments often set prices that are low by U.S. standards. This comes about because these governments have monopsony power–that is, monopoly power on the buyer’s side–and they use this power to get good deals. These governments are, in effect, saying that if they can’t buy it cheaply, their citizens can’t get it.”

Drugs are not too expensive in the U.S.; they’re artificially cheap elsewhere. It’s also not much of an exaggeration to say that new drugs are developed for, and as a result of, the American market because of its pricing flexibility.

Every person benefits when drug companies have an incentive to invest in the public good of pharmaceutical research and development. But each individual government looks out for its narrow interests–for one, to negotiate a low drug price for its own citizens and let people in other countries pay the high prices that generate the return on research and development investments.

Each government, in other words, has an incentive to be a free rider. And that’s what many of them are doing today. The temptation in this country, especially among liberals, is to stop Americans from bearing more than their share of drug development by having the U.S. government set low prices. But if Americans try to get a free ride, there might not be a ride at all. There will certainly be fewer new drugs on the market.

If Obama is elected, I’ll be killing a lot more drugs. And neither you nor your physician, whose preferences are insignificant in the eyes of the government, will have any choice in the matter.